SECTION 2: Digital Value
Chain, E-Business Models
Teemu Hakolahti
[email protected]
Digital Value Chain
Value Chain Analysis
(Porter, 1985)
The primary value chain
activities
(Porter, 1985)
•
Inbound Logistics: the receiving and warehousing of
raw materials, and their distribution to manufacturing as
they are required.
•
Operations: the processes of transforming inputs into
finished products and services.
•
Outbound Logistics: the warehousing and distribution
of finished goods.
•
Marketing & Sales: the identification of customer needs
and the generation of sales.
•
Service: the support of customers after the products
and services are sold to them.
Supporting activities
(Porter, 1985)
• The infrastructure of the firm: organizational
structure, control systems, company culture, etc.
• Human resource management: employee
recruiting, hiring, training, development, and
compensation.
• Technology development: technologies to support
value-creating activities.
• Procurement: purchasing inputs such as
materials, supplies, and equipment.
Value Chain Definition
•
•
•
Profit depends on its effectiveness in performing these
activities the amount that the customer is willing to
pay for the products exceeds the cost of the activities in
the value chain.
A competitive advantage can be achieved by
reconfiguring the value chain
The value chain model is a useful analysis tool for
defining a firm's core competencies and the activities:
– Cost advantage: by better understanding costs and
squeezing them out of the value-adding activities.
– Differentiation: by focusing on those activities associated
with core competencies and capabilities in order to perform
them better than do competitors.
Changes in Value Chain
(Kalakota & Robinson 2001)
Traditional value chain
Core competence
of the company
Firm infrastructure
and processes
Products &
Services
Distribution
channels
Customers
Changed value chain
Needs of customer
Integrated
distribution
channels
Products &
Services
Flexible
infrastructure and
processes
Core competence
of the company
and outsourcing
Digital Value Chain
• How business creates value in both
the physical and virtual level?
Interpret differences and
interactions among the value
adding events of the physical and
virtual level
• Create valuable digital assets that
change the competitive dynamics of
industries (Sviokla and Rayport, 1996)
Virtual Value Chain
(Rayport, Sviokla, 1996)
• Visibility: is where businesses coordinate, measure and sometimes control
business processes
• Mirroring capability: physical steps in the
value chain may be substituted with
virtual ones
– In banking, whereas banks offered a limited
portfolio of services
• Companies use the flow of information in
their virtual value chain to create new
customer relationships by delivering value
to customers in new ways
– E.g. FedEx, package tracking
Intermediation &
Disintermediation
• Approaches to change the value chain
• Business that had previously sold to
retailers via distributors could take a
decision to sell direct electronically, an
approach known as Disintermediation
• By shortening the Value Chain, there may
be benefits in reduced costs or a more
responsive and efficient service
Reintermediation
• eBusiness allows the apparent opposite of
Disintermediation in which a new step or
steps are introduced to the value chain to
add value to the process.
• This is known as Reintermediation and
examples here include shopping portals
and electronic insurance brokers.
E-Business Models
Business Model
• Business model is an architecture for
product, service and information flow,
including description of the various
business partners and their roles.
• It also contains a description of potential
benefits for the actors and a description of
the sources of revenue
• Existing business need to use the Internet
to build on their current business model,
while at the same time experimenting with
new business models to gain a
competitive advantage over competitors
E-Business Model
• E-business is defined as the
transformation of key business processes
through the use the Internet technologies
• When a company has integrated
information and communications
technologies (ICTs) into its operations,
potentially redesigning its business
processes around ICT, then company has
adopted a new business model
(Source: Chaffey, 2002)
Components of Business
Model
Value Proposition
Online Offering
Resource System
Revenue Model
Source: Rayport & Jaworski, 2004
Value Proposition
•
Value proposition is constructed from
three things:
1. target segmentation
2. focal customer benefits,
3. the key resource of the business that can help
deliver the benefit package in significantly
better way than its competitors
•
However, the value cluster approach in
online businesses has acquired
customisation capabilities that allow
them to address multiple customer
segments and offer a variety of benefits
Online offering
• After the value proposition has
been defined, the next step is to
decide products, services and
information for the online offering
• three sequential tasks must be
completed :
1. identify the scope of the offering,
2. identify the customer decision-making
process,
3. map the online offerings to the customer
decision process
Resource System
• The resource system shows how a
company must select its allies and
partners in a business web to deliver the
benefits of the value proposition or cluster
• Business web (b-web) is a distinct system
of suppliers, distributors, commerce
service providers, infrastructure providers
and customers that use internet for their
primary business communications and
transactions
Revenue Model
• It is often difficult to align the
revenue model to company’s value
proposition and online offering
• Companies are trying to figure out
what their customers are willing to
pay for, and how much they are
willing to pay
Sources of revenue
• Advertising. A particular site derives revenue
through the sales of advertisements, banners, site
sponsorships, event underwriting or other forms
of communication.
• Product, service or information sales. The income
is generated from the sale of goods on the site.
• Transaction. The revenue is accrued from charging
a fee or taking a portion based cost from
transactions.
• Subscription. Information and service are a
provided on the subscription basis where and
access relationship is created on the basis of a
fee.
• Licence fee. Content is licensed for use for a fee.
Example: Revenue Model
for music (see next 2 slides)
• Record company’s share of revenues:
– Traditional CD = 12%
– Digital download = 47%
• Music price for customer:
– Cost of traditional cd =17$
– Digital download (depends amount of songs,
normally 12- 14 songs, each 1$, totally ~ 14$)
 WIN –WIN situation for both, record company
and customer. But who loses?
Revenue model for a CD
(Source: keepmusiccoming.com)
Revenue model for US
digital download
(Source: FAD Research, 2004)
Business Model Strategy
(Source: www.e-future.ca)